EUROPE FINANCIAL AND ECONOMIC REPORT: October 28,

UNCLAS SECTION 01 OF 04 BRUSSELS 001482 SENSITIVE SIPDIS NOT FOR INTERNET DISTRIBUTION E.O. 12958: N/A TAGS: EFIN ECON ETRD EIND EINV EUN SUBJECT: EUROPE FINANCIAL AND ECONOMIC REPORT: October 28, 2009 BRUSSELS 00001482 001.2 OF 004 Recent Events: -------------- EC unveils approach for OTC derivatives: -------------- ¶1. (SBU) On October 20, the European Commission published a Communication setting out the approach it plans to follow in regulating the Over-the-Counter (OTC) derivatives market in 2010. The future legislation will aim to: * Reduce counterparty risk by: (i) establishing common safety, regulatory and operational standards for central counterparties (CCPs); (ii) improving collateralization of bilaterally-cleared contracts; (iii) substantially raising capital charges for bilaterally-cleared transactions; and (iv) mandating CCP-clearing for standardized contracts. * Reduce operational risk by promoting standardization of the legal terms of contracts and of contract-processing. * Increase transparency by: (i) requiring that positions and all transactions not cleared by a CCP be recorded in trade repositories; (ii) regulating and supervising trade repositories; (iii) mandating trading of standardized derivatives on exchanges; and, (iv) reviewing the MiFID provisions to extend pre- and post-trade transparency requirements to OTC markets, as well as the authorization and operational requirements, reporting and conduct of business rules to all commodity derivatives dealers. * Enhance market integrity and oversight by giving regulators the possibility to set position limits and by clarifying and extending the scope of market manipulation as set out in the Market Abuse Directive (MAD) to derivatives. The Commission said it would work with U.S. authorities to define which standardized contracts would be cleared centrally. EC consults on proposed framework for cross-border crisis management in the banking sector: -------------- -------------- ¶2. (SBU) On October 20, the Commission published a consultation paper on a future framework for cross-border crisis management in the banking sector. A new framework is envisaged to equip authorities with the right tools and provide legal certainty to handle cross-border banking failures, in ways that minimize costs to taxpayers and allow even the largest banks to fail without damaging financial stability. The Commission is seeking stakeholder input on the following issues: * New supervisory tools for early intervention. * A framework for cross-border bank resolution. * Financing bank resolution * Harmonizing insolvency procedures EC introduces technical amendments to sectoral legislation empowering future ESAs: -------------- - ¶3. (SBU) On October 26, the Commission published a package of legislative proposals to complement its recently proposed legislation to reform the European supervisory framework. With this "Omnibus" proposal, the Commission intends to make targeted changes to existing financial services legislation to ensure that the new European Supervisory Authorities (ESAs) to be created as part of the European System of Financial Supervisors (ESFS) - can work effectively. The Omnibus proposal lays down the scope of the Authorities' powers: aiming to ensure a more harmonized set of financial rules through the possibility to develop draft technical standards, settle disagreements between national supervisors and facilitate the sharing of micro-prudential information. The areas in which amendments are proposed fall broadly into the following categories: * Defining the areas in which the Authorities will be able to propose technical standards (with the aim of developing a single rule book); * Giving the Authorities the ability to settle disagreements between national supervisors; and, * General amendments which are necessary for existing Directives to operate in the context of new authorities (e.g. renaming the current level 3 committees). Early in 2010, the Commission plans to publish further proposals for technical amendments, in particular in the insurance sector, which is not covered by the current proposal. BRUSSELS 00001482 002.2 OF 004 Member States discuss Presidency compromise on CRD II: -------------- -------------- ¶4. (SBU) On October 15, in the context of the second revision of the Capital Requirement Directives (CRD II),which deals with capital charges for the trading book and for re-securitizations, and with the supervisory review of remuneration policies, Member States representatives discussed the following proposals by the Swedish Presidency: * 8% minimum capital requirement for the trading book. This level is considered appropriate pending a study being conducted by the Basel Committee. * Higher capital charges for exposures containing one or more securitization positions, to reflect the higher credit risk of such re-securitizations. * Remuneration schemes would be allowed to vary according to the size on the firm, its internal organization and the nature, the scope and the complexity of its activities. However, guaranteed variable remunerations should be prohibited, and substantial portions of the variable remuneration should be deferred. * Supervisory authorities could be empowered to limit variable remuneration. EC delays CRD III, de Larosiere warns of risks of imposing too high capital ever, the Comm central bank took control of DSB Bank, asmall mortgage bank. The bank collapsed after Q consumer association successfully engineered a run on the bank by encouraging all savers to withdraw their money in protest against the ank issuing "reckless" mortgages. The Dutch Qentral bank was forced to take over DSB aftera weekend of negotiations to sell the bank to a consortium of the five biggest Dutch banks failed over concerns about credit losses and ptential lawsuits from customers. Wouter Bos, the banking crisis, but the banks' own irresponsible lending policies. Upcoming Issues / Events: -------------- European Leaders to try to agree on climate financing and ESRB: -------------- -------------- ¶8. (SBU) On October 29 and 30, the European Council will meet in Brussels. The main topic is likely to the ratification of the Lisbon Treaty - hoping to overcome last-minute difficulties with Czech President Klaus. However, the Leaders are also expected to tackle economic and financial issues, including trying to break an impasse over climate financing and endorsing the creation of the European Systemic Risk Board (ESRB),which has already received ECOFIN approval. EU Leaders are also expected to agree on a common EU position for the next G-20 Finance ministerial. ECB and BoE expected to keep policies largely unchanged: -------------- -------------- ¶9. (SBU) On November 5, the European Central Bank is expected to keep its monetary policy largely unchanged. However, there is some speculation that the Bank of England may leave its interest rate unchanged, but expand its asset-purchase program after the UK's BRUSSELS 00001482 003.2 OF 004 Office for National Statistics announced on October 26 that Q3 GDP shrank 0.4% (economists had expected a 0.2% rise). G-20 Finance Ministers meet to follow up on Summit decisions: -------------- -------------- ¶10. (SBU) On November 7 and 8, the G-20 Finance Ministers and Central Bank Governors will meet in St. Andrews (UK) to launch the new G20 framework for growth agreed upon at the Pittsburgh Summit and to continue working on financial regulatory reform. Recent Events: -------------- ECOFIN agrees on exit strategies and ESRB,disagrees on climate financing: -------------- -------------- ¶11. (SBU) On October 20, EU Finance Ministers agreed that a coordinated exit strategy from expansionary fiscal policy is necessary. * Withdrawal of public support to the economy will happen, but not before the recovery becomes sustainable. The benchmark will be the Commission's next economic growth forecasts, due out on November 3; * Regardless of the pace of recovery, fiscal consolidation should be "started no later than 2011" and should go well beyond the "[excessive deficit procedure] benchmark of 0.5% of GDP per annum"; * Finance ministers said they would discuss a joint exit strategy when they meet again on November 10. ¶12. (SBU) Ministers also agreed to create the European Systemic Risk Board (ESRB). Under the proposal, the ECB has been given the task of ensuring the secretariat of the ESRB which will prepare the meetings, carry out analysis and fulfill an administrative role. However, ministers decided that "further political negotiations" are required on the European Supervisory Authorities in the European System of Financial Supervisors (ESFS). ¶13. (SBU) On tax issues, Austria and Luxembourg vetoed approval of the anti-fraud agreement between the EU and Liechtenstein that could have opened the way for negotiating similar treaties with Switzerland, Andorra, Monaco, and San Marino. Once the EU agrees to exchange tax info with these countries, Austria and Luxembourg will be required to give up banking secrecy. ¶14. (SBU) Disagreements on climate financing remained, leaving EU Leaders to sort out the issue at the next European Council meeting, October 27-29. EC proposes 100 million to Armenia and 46 million for Georgia in MFA: -------------- -------------- ¶15. (SBU) On October 16, the Commission proposed to the Council to provide macro-financial assistance (MFA) for up to 65 million in loans and 35 million in grants to Armenia. The assistance will support Armenia's IMF program and would be provided in two installments, tentatively in the first and fourth quarter of 2010. ¶16. (SBU) Separately, the Commission proposed 46 million in MFA grants to Georgia, as part of an EU package of up to 500 million to support Georgia's economic recovery in the aftermath of the 2008 conflict with Russia. The assistance supports Georgia's IMF program. The grant would be provided in two installments, tentatively in the Q4 2009 and first half of 2010. EIB approves further 600 million in loans for the automotive industry: -------------- -------------- ¶17. (SBU) On October 21, the European Investment Bank (EIB) approved loans to European-based car makers worth a total of 600 million. A 400 million loan will go to Saab for research and development for the improvement of fuel efficiency and safety. Final approval is subject to a guarantee from the Swedish state. A second loan worth 200 million is for Renault to support a new production facility near Tangier, Morocco. In total, since December 2008 the EIB has approved loans to the automotive sector totaling 7.5bn. September inflation down in both Euro area and EU27: -------------- -------------- ¶18. (SBU) On October 15, Eurostat released official inflation figures for September. Euro area inflation has been confirmed at BRUSSELS 00001482 004.2 OF 004 -0.3% y-o-y, down from -02% y-o-y in August. EU 27 inflation was 0.3% y-o-y, down from 0.6% y-o-y in August. August industrial orders expected to increase, while construction suffers ¶19. (SBU) According to Eurosotat estimates, industrial new orders in the euro area grew in August 2009 by 2.0% m-o-m, but fell 23.1% y-o-y. In the EU27, new orders grew by 1.2% m-o-m, but decreased 22.3% y-o-y. ¶20. (SBU) In the construction sector, August 2009 production decreased by 0.4% m-o-m, and by 11.3% y-o-y. In the EU27 construction output also fell by 0.5% m-o-m and by 11.1% y-o-y. MURRAY